US government turmoil casts confusion over Fed taper plans

Chaos in Washington risks disrupting the flow of key economic data used by the
Federal Reserve to make crucial policy decisions and could rule out the
possibility of a so-called 'taper' next month, economists have warned.

A shutdown would include the US Labor Department, which is due to release closely-watched non-farms payroll data on Friday.Photo: CHARELS DHARAPAK/AP

The US government will face its first shutdown in nearly 20 years on Monday night unless the White House and Republicans can broker a last-minute deal to avert a closure that is predicted to cost the US economy more than a billion dollars.

A shutdown would include the US Labor Department, which is due to release closely-watched non-farms payroll data on Friday. Job figures have become the focus of intense attention in recent months, ever since Ben Bernanke, chairman of the US Federal Reserve, said interest rates would stay low as long as unemployment remained above 6.5pc.

"A government shutdown could interrupt the flow of economic data. At such a critical time, when the Fed has made clear that any decision on tapering will be data dependent, that means no data, no decision," said Societe Generale in a note to clients.

Even if the Labor Department is able to release jobs data on Friday, others think the political chaos surrounding budget negotiations, coupled with the looming debt ceiling as the US government approaches its borrowing limit, will prevent the Fed from departing from its current path in next month's policy meeting.

"Recent events on both sides of the Atlantic are a keen reminder why markets are right to hate politics," said Kathleen Brooks, research director at Forex.com. "A government shutdown coupled with concerns about the debt ceiling could put tapering to bed for some time."

Economists are relatively sanguine about the impact of a short-term shutdown, which is expected to reduce America’s quarterly GDP growth by around 0.15 percentage points for every week that the services blackout lasts.

However, they fear that anything lasting longer than a week or two would raise serious questions about the effectiveness of America’s government, severely denting confidence and raising the likelihood that the economic superpower will breach its debt ceiling next month.

Michael Gapen, director of US economic research at Barclays, said: “A shutdown of a couple of weeks would have relatively little [economic] impact, but there could be knock-on effects if confidence wanes or a prolonged shutdown signals something worse. It says something about our ability to govern.”

Investors' biggest concerns is that the Republican-Democrat stand off over the stop-gap budget to keep the US government running, will raise the temperature on the even more serious, parallel game of brinkmanship over America’s borrowing limit.

US Treasury Secretary Jack Lew warned last week that the US is set to breach this limit on October 17, but Congressional Republicans are standing firm on the list of concessions they want President Obama to make before they will agree to extend the borrowing limit.

It is the third time since President Obama took power that budget negotiations have gone to the wire in this way, and many investors - jaded by previous stand-offs - were feeling confident that the Congress would reach some sort of eleventh-hour agreement.

However, that confidence has started to wane over the last week. Wall Street has started to bet on a long-term stand off. Meanwhile, treasury officials are pessimistic about the odds of a US government default, which, they fear, would knock America back into recession.

The prospect of a shutdown increased sharply over the weekend when Republicans in the House of Representatives agreed to fund the US government but only if Democrats agreed to a one-year delay to Mr Obama’s signature healthcare reforms.

The Republican proposal was immediately rejected by Mr Obama who has repeatedly said he will not compromise over the main legislative achievement of his first term which is still bitterly opposed by Republicans.

Leaders in the Democrat-controlled senate promised to reject the Republican proposal when they meet on Monday afternoon and will throw it back at the Republican leadership in the House who will then have only eight to 10 hours to decide how – or if - to avoid a shutdown.

A US Government closure would hit non-essential services such as National Parks network, and passport and driving licence renewals, and estimates say could cost the US economy up to $2bn dollars as about 800,000 US Federal government workers were put on temporary unpaid leave.

The fight over passing a new Continuing Resolution prefigures a potentially much more serious dispute later next month, when Congress will have to extend the Debt Ceiling which the US Treasury estimates will be reached by October 17.